TAX TREATMENT OF LIFE INSURANCE AND ANNUITIES Flashcards
what is the effect of an outstanding loan if the insured dies?
the death benefit will be reduced by the loan amount and any interest owed.
T or F: dividends are treated as a return of overpaid premium, and re not taxable when returned to policy owners.
true
a client who contributed $100,000 to an annuity dies when it is wroth $200,000. what is her death benefit?
$200,000. the death benefit of an annuity is the greater of contributions or the account value at death.
in a qualified annuity, how is the payout taxed?
the entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars
are variable life insurance loans taxable?
no, but interest is charged to the policyholder
T or F: individual life insurance premiums are generally paid with pre-tax dollars
false. individual life insurance premiums are generally paid with after-tax dollars
does the cash value of a MEC grow on a tax-deferred basis?
yes, as long as money remains inside the contract, MEC cash value grows tax-deferred. However, withdrawls are taxable
what is the typical cost basis for a qualified retirement plan?
$0, since qualified plans are typically funded on a pre-tax basis
what is another name for all of the deceased’s assets?
the estate
a nonqualified annuity allows for _______ contributions and the annuity value grows on a _____ basis
after-tax contributions, tax-deferred basis
the cost basis of a cash value contract consists of premiums paid for the ____ policy, but not ____
base policy but not the riders
are life insurance death benefits taxable?
no, they are tax free
the death benefit provided by a qualified annuity is ____ to the beneficiary
taxable
any interest earned on dividends left to accumulate with interest would be taxable as ______
ordinary income
in a non-qualified annuity, how is the payout taxed?
only the earnings portion is subject to tax as ordinary income
can a policy classified as a MEC ever be classified as a “non-MEC” policy
no, once an MEC, always an MEC
T or F: distributions from an MEC are taxed on a first-in/first-out (FIFO) basis
false, distributions from an MEC are taxed on a LIFO (last-in/first-out)
a premature distribution penalty of ___ % is assessed against annuity withdrawals taken prior to age ______
10% at age 59 1/2.
dividends are paid by a _____ company
a mutual company
which annuity allows for a pre-tax contribution - qualified or nonqualified?
a qualified annuity
the cash value grows within a contract on a _____ basis
a tax-deferred basis
distributions from a qualified plan are taxed at ____ rates
ordinary income rates
how is a nonqualified annuity benefit taxed?
the benefit is taxed on a LIFO basis
what does MEC stand for
modified endowment contract
estate taxes comprise both ___ and ____ taxes
state and federal taxes
how is the death benefit on a life insurance policy taxed?
the death benefit is always received by the beneficiary on a tax-free basis
what type of annuity may be used as a platform for an IRA?
a qualified annuity
a qualified annuity allows for _____ contributions and the annuity value grows on a ______ basis
pre-tax contributions, tax-deferred basis.
is the death benefit of an annuity included in a deceased client’s estate?
yes. it becomes part of the estate and any amount over the cost basis may be taxable to the beneficiary
if no beneficiary is listed or alive upon an insured’s death, a death benefit will be payable to the insured’s _____
estate
when paid to a beneficiary, is the death benefit from an MEC-classified policy taxable?
no
the death benefit received by a beneficiary is received ____
tax free
are life insurance death benefits included in the value of the deceased insured’s estate?
yes
in a nonqualified annuity, how is a single distribution taxed?
earnings first, LIFO
to be excluded from a person’s estate, a piece of property must be sold within ___ years of death
3 years
a policy is considered an MEC based on the ____ pay test
7 day pay test
if classifid as an MEC, distributions from the policy will be considered _____
taxable as income
what is the dollar limit that may be contributed annually to a nonqualified annuity?
there is no contribution limit
upon policy surrender, any cash value in excess of premiums paid will be taxable as ____
ordinary income
Joan invests $15,000 in a qualified annuity. At age 64, she withdrawals all $22,000. what’s Joan’s basis and what’s taxed?
her basis is zero, since the annuity is qualified (funded pretax) and the entire $22,000 is taxed as ordinary income
is there a tax consequence to taking out a loan against a policy’s cash value?
no, there are no tax consequences
interest earned is always ___
interest earned is always taxable
what rule states that property must be sold within 3 years prior to death to eliminate inclusion in a person’s estate
the transfer of value rule
the cash value of a whole life contract usually begins to show a value sometimes in the _____ year following issue
3rd year
T or F: premiums paid for individual life insurance are not deductible
true
name four items that may be included in a persons’ estate
real and personal property, life death benefits, annuity values, retirement funds, and ownership rights in real property
what technique may be used to roll assets from one annuity to another without taxation
a 1035 exchange
describe a modified endowment contract
a life insurance policy in which the premiums paid are not in proportion to the death benefit provided
a negative tax consequence may be created when the cash value policy is ______
surrendered
premature distributions from an MEC will be subject to ______ and a _____ % IRS penalty
a taxation and a 10% IRS penalty
in an MEC policy, premiums paid during the first ___ years of the policy exceed what’s needed to fund a ___ -pay life plan?
7 years, 7-pay life plan
distributions from an MEC are considered premature if taken prior to age ______
59 1/2
list some of the taxable distributions from an MEC
cash value surrender, dividends received, and policy loans
the term MEC is a ____ of a life insurance contract, according to the IRS
classification
which annuity is funded with after-tax dollars – qualified or nonqualified?
non-qualified annuity
joe’s policy has a cash balue of $30,000 and his premiums were $28,000 if he surrenders the policy, what is taxable?
the cash value that exceeds premiums paid for the base policy would be taxable, $2,000
what percentage of income from a qualified plan is typically taxable
100% since qualified plans are normally funded with pre-tax funds and have zero cost basis
are dividend returns on a life insurance policy ever guaranteed?
no
_____ is the equity that grows within a whole life policy
cash value
what percentage of the benefit received from a qualified annuity is subject to taxation
100% since the annuity is funded with pre-tax dollars
what occurs when an insured dies and his policy has an outstanding load?
the loan amount and any interest owed will be subtracted from the death benefit
what occurs when an insured dies and his policy has an outstanding loan?
the loan amount and any interest owed will be subtracted from the death benefit
ann invests $15,000 in a nonqualified annuity. at age 64, she withdraws all $22,000. what’s taxed?
her basis is $15,000. annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.
a client who contributed $100,000 to an annuity dies when it is worth $50,000. what is the death benefit
$100,000. the death benefit on an annuity is the greater of contributions or the account value at death
